An IRC Section 1031 exchange is also called a like-kind exchange. A 1031 exchange will allow you to shield the gains from the sale of a business or an investment property by reinvesting the funds in a similar type of asset.
A 1031 exchange is a powerful tool for investors who wish to increase the value or scope of their investment portfolios without incurring tax expenditures on the gains from selling existing assets. However, there are specific requirements that must be fulfilled to benefit from a 1031 exchange and it is essential that you follow the required procedures in order to realize the tax benefits. The Lotzar Law Firm, P.C. can represent clients in Scottsdale, Phoenix and throughout Arizona and guide them through the 1031 exchange process to protect their profits.
Understanding a IRC 1031 Exchange
When a business or investment property is sold for a profit, the sale normally triggers tax liability. However, a like-kind exchange makes it possible to defer the taxes that would normally be paid as part of the sale.
The proceeds must be invested in a similar property, but can include like-kind property in addition to liabilities, cash and other property that is not like-kind. However, 1031 exchanges do not apply to certain kinds of property or assets including:
- Stocks, bonds and notes
- Stock in trade
- An ownership interest in a partnership
- Certificates of trusts
- Other debts/securities
The property or assets that you sold and the property or assets being purchased must be similar enough to actually qualify as “like-kind” property. The IRS defines like-kind property as property that has the “same nature, character or class.” The quality of the specific items is not relevant. For example, selling an inexpensive property and realizing the gains on it can make it possible for you to enter into a like-kind transaction for the purchase of other types of real estate that is more valuable or that has a higher cost.
Both real and personal property can qualify for like-kind exchanges, but cannot be considered like-kind to each other.
In addition to restrictions regarding what qualifies as “like-kind” property, it is also important to understand the time limits associated with completing your transaction. You have 45 days from the date of the sale of the property to identify potential replacement properties in writing. The replacement property must also be received and the exchange completed within 180 days of the earlier of the sale of the exchanged property or the due date of the income tax return for the year in which the property is sold.
Lotzar Law Firm, P.C. can help clients with the 1031 exchange process in Phoenix to ensure they comply with requirements and protect their tax advantages. Call today to speak with a member of our legal team and learn more.